Silicon Valley Bank’s demise began with a downgrade threat
By Echo Wang
(Reuters) – In the middle of last week, Moody’s Investors Service Inc delivered alarming news to SVB Financial Group, the parent company of Silicon Valley Bank: the rating agency was preparing to downgrade the bank’s credit rating. That call was described by two people familiar with the situation as the process of the startup-focused lender’s spectacular collapse on Friday, the biggest bank collapse since the 2008 financial crisis, began.
Friday’s collapse sent global markets rattling and banking stocks reeling. Investors worry that the Federal Reserve’s aggressive rate hikes to fight inflation are exposing vulnerabilities in the financial system.
The details of the SVB’s failed response to the prospect of a downgrade, first reported by Reuters, show how quickly confidence in financial institutions can erode. The failure also sent shockwaves through California’s startup economy, as many companies were unsure of how much of their deposits they could recover and worried about how to run payroll.
Moody’s call came after the value of the bonds, where SVB had parked its money, fell due to higher interest rates.
Concerned that the downgrade could undermine investor and customer confidence in the financial health of the bank, SVB CEO Greg Becker’s team called for advice from bankers at Goldman Sachs Group Inc. and flew to New York to meet with Moody’s and others to meet rating agencies, the sources said.
The sources asked not to be named as they are bound by confidentiality agreements.
SVB then worked on a plan over the weekend to increase the value of its holdings. It would sell more than $20 billion worth of low-yielding bonds and reinvest the proceeds in assets that generate higher yields.
The deal would generate a loss, but if SVB could fill that funding gap by selling shares, it would avoid a multiple notch downgrade, the sources said.
The plan backfired.
News of the stock sale spooked customers, particularly tech startups, who rushed to withdraw their deposits, turning fundraising on its head. Regulators intervened on Friday, closing the bank and placing it under receivership.
Representatives from SVB, Goldman Sachs and Moody’s did not immediately respond to requests for comment.
As SVB executives debated when to proceed with fundraising, they heard from Moody’s that the downgrade was coming this week, the sources said.
Hoping to soften the blow, the SVB springed into action.
The bank assembled private equity firm General Atlantic, which agreed to buy $500 million of the $2.25 billion stock sale, while another investor said it couldn’t reach an agreement within the timeline of achieve SVB, the sources said.
As of Wednesday, SVB had sold the bond portfolio for a $1.8 billion loss.
Moody’s downgraded the bank, but only one notch, over the sale of SVB’s bond portfolio and plans to raise capital.
Ideally, the sale of shares would have been completed by market open on Thursday to avoid the sale being jeopardized by a fall in SVB shares once news of the sale broke. But the sources said that’s not an option given the tight schedule.
SVB had not done the necessary preparatory work to sign confidentiality agreements with investors who would commit to a deal of this magnitude. Their lawyers advised the bank that it would take investors at least 24 hours to digest new pessimistic financial forecasts and complete the sale, the sources said.
Reuters could not determine why the SVB did not start these preparations sooner.
SVB stock plummeted on the news of the stock sale, closing up 60% at $106.04 on Thursday. Goldman Sachs bankers were still hoping they could close the sale at $95, the sources said.
Then came news from venture capital firms advising startups they had invested in to pull money out of Silicon Valley Bank amid fears of an imminent bank run.
This quickly became a self-fulfilling prophecy: General Atlantic and other investors walked away, and stock sales collapsed.
General Atlantic did not respond to a request for comment.
California’s banking regulator closed the bank on Friday and appointed the Federal Deposit Insurance Corporation (FDIC) receiver. The FDIC will divest its assets.
In the past, the regulator has been quick to close deals, sometimes just over a weekend, which some experts at SVB say could happen.
(Reporting by Echo Wang in Washington; Editing by Greg Roumeliotis and William Mallard)